Online car services

China's ailing car industry: Being a bull in a bear market

Despite disruption caused by the coronavirus and an overall slowdown in passenger car sales in China, Ian Zhu, managing partner of NIO Capital speaks to FinanceAsia about where he is parking his next investments in the Chinese auto sector.

In the markets, shares of Tesla dipped 14% on Thursday (February 27) on the back of poor registrations in China. Data from LMC Automotive revealed just over 3,500 Tesla vehicles were registered in January, down from 6,613 the month before.  

The investor anxiety highlights a broader concern about the capacity of the Chinese auto sector to weather the market disruption caused by the coronavirus outbreak. Vehicle sales in the country fell by almost a fifth in January, according to China Association of Automobile Manufacturers data, although not all of that should be apportioned to the virus.

Overall, the China car market is seeing a historical slowdown. Passenger car sales decreased by 4% year-on-year in 2018, the first time since 1990. And the decline was even more pronounced in 2019, as car sales shrank by 7.4% year-on-year to 20.7 million vehicles.

The coronavirus will undoubtedly impose additional challenges on an auto industry keen to regain positive momentum. With many Chinese citizens unable to get back to work, car production and sales will be delayed, while some state-owned entities are focusing energies getting the virus under control; the FAW Group, for example, has turned one of its car manufacturing lines into a face mask production line.

But investors who focus on this sector are positive there a plenty of opportunities out there and the pain will be short lived.

“The virus will, of course, have an impact for the whole industry in the short term. But as government imposes strong controls to contain it, the restrictions on the society will be lifted soon,” Ian Zhu, managing partner of NIO Capital told FinanceAsia

Established in 2016, NIO Capital was founded by Chinese EV maker NIO in partnership with Sequoia Capital China and Hillhouse Capital to invest in the automotive sector, logistics, energy and new technologies.

NIO Capital has invested in a dozen of startups that conduct business in transportation, some in autonomous driving too., one of its portfolio companies since last year, for example, just received $462 million investment led by Toyota on February 26.

Zhu shared his thoughts with FinanceAsia about what pockets of opportunity he believes are out there in the current situation and confirmed that NIO Capital is also looking into an online second car-selling company and will announce the investment soon. He said the target company focuses on providing aftersales services.

The following conversation with Zhu has been edited for brevity and clarity.

Q You completed fundraising for your first US dollar fund in December. How is that coming along?

A Our US dollar fund raised over $200 million and we already have invested $90 million in about 10 projects. Most of our portfolio companies are in the early stage. On average, our investment is about $10 million to $20 million, depending on the project. The next one to two years is the critical investment period for our fund.

Our focus is on mobility, logistics and energy, involving all the downstream applications in each specific industry in China. Also related business such as logistics, real estate and car insurance are among our areas of focus.

Q How will the virus affect the transportation business?

A Currently people’s willingness to travel has dropped under the virus outbreak. It is a short-term negative impact, but under government control, the number of new confirmed cases is decreasing.

I believe the current travel ban will eventually be lifted, and transportation will be back to normal… However, it will bring huge pressure to those companies who don’t have sufficient cash flow.

The virus may affect people’s willingness to buy a car. More people would like to own their private car as they find driving convenient. I think there might be an uptick on car sales after the virus.

Q What kind of new opportunities do you see from this virus outbreak?

A Many people are working and communicating with others online. So many people are even trying to buy a car online. As such, more and more car companies are trying to provide a better online service to their customers.  I think this could have long-term implications, and we are looking at some investment opportunities in online business models.

Another opportunity may evolve in the consolidation of non-performing assets. Those companies in the auto industry suffering a cash drought amid the virus outbreak, may end up being acquired by bigger players in the industries. We might see more merger and acquisitions coming down the road.

Q What kind of new service companies you are looking into?

A We are about to invest in a company that uses internet traffic volume to promote car sales. It uses campaigns, such as videos, to attract customers. We would like to explore opportunities in this new service model for car buyers.

Q Tesla set up its Shanghai factory in January. What will be the impact of this for Chinese electronic vehicle (EV) industry?

A I think the factory setup shows the importance of the Chinese market. It is a strategic move for Tesla. And it is also a good education process for Chinese customers, as people are welcoming of EVs. This move also helps to lower the price for fuel vehicles and will impact the traditional car selling business.

It can promote the Chinese EV industry in the long term. As Tesla enters the Chinese market, it also teaches Chinese EV makers to differentiate, to bring your character and strength to the market.

Chinese EV makers can only be competitive when they bring unique services and experiences to their users. Otherwise, Tesla will easily surpass them.

Q Hillhouse Capital recently sold its shares in NIO, the Chinese EV maker. What is your comment on this as an investor?

A I think it is only their judgement based on the stock itself, not a judgement of the whole industry – a matter of a different asset allocation strategy.

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